Indexology^® Blog

The S&P Composite 1500^® serves as a benchmark for the U.S. equity market, aggregating the performance of large caps, mid caps and small caps. While the S&P 500^® has global relevance, there is a universe beyond the S&P 500 that market participants sometimes overlook. The mid- and small-cap segments, as measured by the S&P MidCap 400^® and S&P SmallCap 600^®, offer distinct views in terms of exposure, sensitivity, diversification and return drivers.

Compared to The 500™, the S&P 400^® and S&P 600^® indices have different sector weights. As of Jan. 31, 2025, they were primarily underweight in Information Technology and Communication Services, while having greater weight in Industrials, Financials, Real Estate and Materials. Although weights vary across the size spectrum, the mid- and small-cap segments had higher weight in domestically focused sectors.

Additionally, the mid- and small-cap segments tend to be more diversified than their large-cap counterpart, which could be relevant for market participants looking to diversify away from large names. Using the adjusted HHI¹ to measure concentration, Exhibit 2 shows that the S&P 400 and S&P 600 were less concentrated than The 500.

Moving down the size spectrum presents both opportunities and challenges, resulting in different risk/return profiles. As shown in Exhibit 3, the S&P 400 and S&P 600 outperformed the S&P 500 over various periods but, not surprisingly, exhibited more volatility.

The S&P Composite 1500 is constructed with an earnings screen that requires consistent profitability for its new constituents. Therefore, in addition to the size tilt, the indices also have a positive tilt toward quality. Moreover, the S&P 400 and S&P 600 also tend to have a significant tilt toward value.

Considering indexing beyond large caps, Exhibit 5 presents data from our SPIVA Scorecards in the mid- and small-cap segments, demonstrating that active managers have found it challenging to outperform the S&P 400 and S&P 600. In fact, the percentage of underperforming funds increased to over 90% for longer time periods.

The S&P 500 is a staple in the U.S. equity market, but the S&P 400 and S&P 600 may offer interesting and distinct characteristics: diversification from mega-cap companies, tilts toward more domestically focused sectors and a reflection of high-growth prospect companies. In addition to these drivers, the indices have historically shown quality and value tilts. Furthermore, most active managers underperformed the indices over different time periods, providing evidence that a low cost, index-based approach can offer outperformance in the mid- and small-cap segments.

¹The Herfindahl-Hirschman Index (HHI) is a widely used metric for measuring concentration, determined as the sum of the squared percentage weights of the index constituents. The adjusted HHI is calculated by dividing the index HHI by the HHI of an equally weighted portfolio with the same number of stocks.
For more information, see “Concentration within Sectors and Its Implications for Equal Weighting”, S&P Dow Jones Indices.

The energy transition represents a crucial market force with the potential to revolutionize our world. Over the two decades from Jan. 31, 2005, to Jan. 31, 2025, the S&P 500^® demonstrated a significant decarbonization, evidenced by a 73.9% decrease in its weighted average carbon intensity, as illustrated in Exhibit 1.¹ This material decrease highlights a shift in dynamics among The 500™’s constituents.

Central to this decarbonization is the growing adoption of renewable energy sources alongside a reduction in the use of fossil fuels. By utilizing S&P Global Trucost’s Environmental data suite, we analyzed the energy consumption of S&P 500 constituents based on energy source, tracking changes in this energy mix over the past decade.¹ The findings of this analysis are summarized in Exhibit 2, which outlines the significant shifts in energy consumption patterns observed in recent years. Over the past decade, the role of renewables—consisting of hydroelectric, biomass and other renewables components—in the S&P 500’s energy mix has more than doubled, jumping from 95.7k GWh to 200.6k GWh.

In contrast to the growth in renewables, the consumption of fossil fuel-based energy—consisting of coal, petroleum and natural gas—has declined by 8.8% within The 500, with petroleum usage nearly reduced to a quarter of its previous level, dropping from 16.5k GWh to 4.4k GWh (see Exhibit 2). This transition toward cleaner energy may be indicative of a market that is adapting to new economic conditions and embracing innovation.

In summary, the energy transition appears to be affecting S&P 500 constituents, and this serves as an indicator of how decarbonization is reshaping market dynamics. The insights derived from observing the The 500 during this transformative phase underscore the path the world is on as the energy landscape continues to evolve. For those interested in further examining the carbon metrics and fossil fuel reserves associated with S&P DJI’s indices, additional details can be found in the Sustainability Index Dashboard.

¹ Analysis carried out using Portfolio Analytics on S&P Capital IQ Pro.

Over the last 10 years, sustainable investing has become increasingly prevalent, and concerns surrounding the risk of greenwashing have increased. To assist S&P DJI’s customers with new European Securities and Markets Authority (ESMA) fund naming guidelines, S&P DJI announced the renaming of the S&P 500^® ESG Index to the S&P 500 Scored & Screened Index. Please note that the regulatory guidance under the ESMA guidelines on fund names using ESG or sustainability-related terms does not apply directly to S&P DJI.¹

S&P 500 Scored & Screened Index: Same Methodology, Different Name

The S&P 500 Scored & Screened Index’s objective remains the same: to track securities that meet specific sustainability criteria while reflecting the S&P 500’s industry group weights.

The name change does not alter the methodology; the criteria for selecting and excluding constituents remain unchanged, ensuring consistency as a benchmark.

• The index applies various eligibility criteria, such as UNGC screens, S&P MSA Screens and S&P Business Activity Screens before using S&P Global ESG Scores to select and exclude constituents. The index aims to reflect 75% of the market cap within each industry group, focusing on the top-ranking eligible index constituents by S&P Global ESG Score to maintain sector neutrality.

The S&P 500 Scored & Screened Index has continued² to achieve an enhanced ESG score against the S&P 500 with an absolute 5.05% increase in aggregate (see Exhibit 2).

The S&P 500 Scored & Screened Index has maintained similar sector weights as the S&P 500,³ posting only a 6.44% sector-active share as of Feb. 10, 2025 (see Exhibit 3).

While performance is not the objective of the index, the S&P 500 Scored & Screened Index has outperformed the S&P 500 over the mid and long term, and not at the expense of an increased risk profile, as seen in Exhibit 4. Moreover, the S&P 500 Scored & Screened Index has maintained comparable performance to the S&P 500 thanks to its similar industry group weights, with an average annualized tracking error of 1.36%, demonstrating a relatively low deviation.

Ecosystem

The ecosystem linked to the S&P 500 Scored & Screened Index remains intact,⁴ supporting a variety of financial products such as ETFs, ETDs, mutual funds, insurance products and structured products. Key offerings include E-mini S&P 500 ESG Index Futures⁵ from CME and options contracts from Cboe.⁶ Despite the name change, the ecosystem’s integrity and functionality continue to benefit investors and financial institutions.

Conclusion

The transition from the S&P 500 ESG Index to the S&P 500 Scored & Screened Index represents a significant step to accommodate index users in line with the ESMA guidelines on the use of ESG and sustainability-related terms in fund names while preserving the index’s core principles. The index methodology remains the same, ensuring its reliability as an underlying benchmark for a vast ecosystem.

For more information about the S&P 500 Scored & Screened Index and our other sustainability indices, please visit our website or reach out to our client services team.

¹S&P Dow Jones Indices, Education. “FAQ: Index Name Changes in Response to the ESMA Guidelines on Funds’ Names Using ESG- or Sustainability-Related Terms.” Jan. 9, 2025.

²Sanchez, Maria. “A Measure of Success – The Evolution of ESG Scores in the S&P 500 ESG Index.” S&P Dow Jones Indices – Indexology^® Blog. Nov. 12, 2024.

³ Rowton, Stephanie. “Sector Neutrality – An Essential Mechanism within the S&P 500 ESG Index.” S&P Dow Jones Indices – Indexology^® Blog. Sept. 9, 2024

⁴ Spivey, Aran, Michael Orzano and Igor Zilberman. “The Growing S&P 500 ESG Index Liquidity Ecosystem” S&P Dow Jones Indices. Jan. 5, 2024.

⁵ See https://www.cmegroup.com/markets/equities/sp/e-mini-sandp-500-esg-index.html

⁶ See https://www.cboe.com/tradable_products/sp500/esg_spx_options/

In a previous blog, we delved into the S&P Global Sustainable1 Climate Action Framework, a powerful tool designed to gauge companies’ readiness for the low-carbon transition across three key pillars: Climate Governance and Strategy, Physical Risk Adaptation Strategy, and Climate Risk Mitigation and Alignment.

In this blog, we introduce the recently launched S&P World Climate Resilience Tilted Index, which presents an innovative approach to incorporate climate-related factors within an index. The index incorporates elements of the S&P Global Sustainable1 Climate Action Framework, carbon intensity and climate solution revenue exposure indicators, aiming to increase the weight or tilt toward companies that are relatively more climate resilient, carbon efficient and have higher exposure to green revenues. It was designed to complement S&P DJI’s family of indices that integrate climate-related data by providing an index solution that factors in forward-looking climate transition considerations alongside climate risk and opportunity aspects, while remaining broadly diversified.

Introducing the S&P World Climate Resilience Tilted Index

The S&P World Climate Resilience Tilted Index is a broad-based index that aims to be industry group- and region-neutral relative to its underlying index, the S&P World Index.^[1]

The index does not seek to exclude specific sectors that are traditionally removed or underweighted from indices that focus on climate-related factors, such as Energy and Utilities. The index does, however, apply a few, common safeguarding exclusions (see Exhibit 1). Instead, the index aims to retain strong representation of sectors that have carbon-intensive companies that are nevertheless thought to be crucial to help adjust to a lower GHG emissions economy.

The index then tilts eligible companies’ weights within each tilting group^[2] based on four tilting factors, as shown in Exhibit 2. These include backward-looking climate metrics, such as Carbon Intensity^[3]; strategy-related forward-looking elements, such as two pillars of the S&P Global Sustainable1 Climate Action Framework—namely the Climate Governance and Strategy and Physical Risk Adaptation Strategy; and finally, a component that reflects climate transition opportunities, as measured by the revenue exposure to Climate Impact Solutions.

By design, the index shows low active sector weights relative to the underlying S&P World Index. Traditionally underweighted sectors like Energy and Utilities have been preserved at similar benchmark sector weights, as the tilting is applied within the region-industry-group tilting groups, minimizing unintended sectoral biases. In other words, companies are under/overweighted only relative to their tilting group peers, resulting in a weighting scheme that is more comparable to the underlying index (see Exhibit 3).

The low sector active weights compared to the underlying index are also reflected in the reduced observed levels of tracking error historically, which were below 100 bps for all tested time periods (see Exhibit 4). In terms of performance, the return differential between the S&P World Climate Resilience Tilted Index and the S&P World Index was reduced (see Exhibit 5).

Based on back-tested historical data, the index achieved improvement across all tilting factors that are controlled for in the methodology, such as lower index-level weighted-average carbon intensity (WACI), lower exposure to physical risk and higher revenue exposure to companies providing solutions for climate impact (see Exhibit 6). Additionally, we see higher exposure to Transition Strategic companies and lower exposure to Transition Limited companies, which, while not controlled for explicitly, are a beneficial byproduct from the specific data inputs used in the index methodology.

The tangible impacts from climate change present a deeply complex global challenge. For investors seeking a tool to help integrate and measure climate-related considerations while maintaining broad sector diversification and leveraging forward-looking climate transition readiness signals, the S&P World Climate Resilience Tilted Index may provide an effective solution.

^[1] Please see index methodology here.

^[2] Tilting groups are defined as region-industry groups.

^[3] Please note that the index does not target a specified weighted-average carbon intensity improvement relative to the parent index.

No matter how vast the index landscape becomes, sectors remain central to the conversation. From TV studios to trading floors, and around the world, the 11 GICS^® sectors are widely recognized and discussed, reflecting their enduring utility as indicators of which way markets and economic winds are blowing. They are also valuable building blocks for tailoring views of the U.S.-domiciled, globally exposed members of the S&P 500^®.

January presented another opportunity for thoughtful tilts, as investors navigated the unexpected following an election-year November and a December marked by high dispersion, making their views known through sector performance. In Exhibit 1, we show January performance of The 500™ along with each of its component GICS sectors. January marked the third month in a row that the sector spread (the different between highest- and lowest-performing sectors) reached double digits, at 12.0%. Information Technology was the sole decliner, falling 2.9% largely on the heels of a new entrant in AI upending the competitive landscape and erasing nearly USD 800 billion in market cap from two constituents in a single day.

Although losses among a handful of mega-cap stocks grabbed the headlines and affected The 500’s performance near the end of the month, looking at Exhibit 1 we can see that 7 out of 11 sector indices actually outperformed the broad benchmark in January, led by Communication Services rising 9.1% after a series of positive earnings reports. Looking more closely, we see that those seven outperformers contain a mix of historically defensive and cyclical sectors.

The simple classification of sectors as cyclical versus defensive is well accepted and discussed in recent research as a function of the observation that certain sectors have tended to perform better or worse depending on whether the market is rising or falling, exhibiting betas above or below one as well as a range of historical volatility. Understanding which sectors have historically outperformed in each phase, a market participant might identify which sectors align with their own economic outlook and change their sector views accordingly. Bucketing sectors into defensive and cyclical based on ranking their risk attributes and their excess returns during rising or falling markets can allow for rational tilts based on highlighting sectors that have historically offered relatively better performance in each environment.

Extending from recent research testing blends of sectors through historical crises, we use the same two approaches below to understand sector performance over the course of January.¹

Cyclical Blend: An equal-weighted combination of five cap-weighted cyclical sectors (Information Technology, Financials, Materials, Consumer Discretionary and Industrials), rebalanced monthly.

Defensive Blend: An equal-weighted combination of five cap-weighted defensive sectors (Utilities, Energy, Consumer Staples, Health Care and Communication Services), rebalanced monthly.

Exhibit 2 illustrates the hypothetical performance of each blend, perhaps indicating that the sum of the parts is sometimes greater than the whole, as both the defensive and cyclical blends outperformed The 500.

S&P 500 sectors continue to play versatile roles in a variety of strategies. From making strategic and tactical tilts, to reflecting the diversification qualities that come from blends, sector approaches have endured and will continue to help us understand markets in 2025 and beyond.

¹ Cyclical and defensive blends are comprised of the top five and bottom five sectors as ranked by historical beta and volatility. Real Estate, ranked in the middle of the 11 S&P 500 sectors, is excluded from this analysis.